Does the Federal Reserve keep an eye on inflation and ignore the “dark thunder” of employment? LISEP warns: Functional unemployment has risen four times in a row, and the labor market is losing blood

The Zhitong Finance App notes that the US Department of Labor's unemployment rate has continued to decline in recent months, reversing last year's upward trend, but another alternative indicator tells a different story.

In July, the official unemployment rate fell to 4.1% from 4.2% in June and 4.5% in November. This Friday, the August employment report will be released. Wall Street expects the unemployment rate to remain at 4.1%, while adding 50,000 new jobs, rebounding from an unexpected drop of 23,000 jobs in July.

Despite recent weak employment growth, the Department of Labor's unemployment rate indicators have been declining due to the retirement of baby boomers and the contraction of the overall labor market due to President Trump's immigration crackdown.

In fact, the break-even point of employment growth — the number of new net jobs needed each month to keep the unemployment rate stable — turned slightly negative during the summer and fall of 2025. Economists expect this to happen again in 2028, which means the economy will need layoffs to keep the unemployment rate stable.

At the same time, the number of initial jobless claims also remained low, continuing the labor market pattern of low recruitment and low layoffs, as companies remained cautious in the context of Trump's tariffs and the war against Iraq.

The official unemployment rate is so low that Fed policymakers see it as a sign that the economy has reached or is close to full employment. Federal Reserve Chairman Kevin Walsh expressed similar views during his speech in Jackson Hole, Wyoming last Friday.

As a result, the Federal Reserve is now focusing on fighting inflation rather than another part of its dual mission, which is to support the labor market.

But the Ludwig Institute for the Economics of Shared Prosperity (LISEP) is less optimistic about the workforce. The agency published a “real unemployment rate” indicator, which measures the “functionally unemployed” population, including the unemployed, those with involuntary part-time jobs, and those earning less than the poverty line.

The indicator rose for the fourth month in a row in July, in stark contrast to the official unemployment rate, which has been declining steadily this year. Currently, the share of functionally unemployed people in the labor market is 24.9%, up 1.3 percentage points since March.

Similarly, the share of the working-age population not in functional employment as measured by LISEP — including those leaving the labor market — reached 53.8%, an increase of 0.8 percentage points since the beginning of the year.

LISEP Chairman Gene Ludwig said in a low August statement, “The functional unemployment rate is rising while the labor force participation rate is falling. If this continues, it could mean that the labor market is losing momentum, no matter how the headline unemployment data shows,”

Last month, the functional unemployment rate for black workers remained flat at 27.3%; white workers rose 0.6 percentage points to 23.8%; and Hispanic workers fell 1.5 percentage points to 26.7%.

For men, the ratio fell 0.9 percentage points to 19.5%; for women, the ratio soared 1.6 percentage points to 31%, the highest level since March 2021 (when the economy was still recovering from the impact of COVID-19).

Some demographic differences may reflect several intersecting forces in the economy. The boom in artificial intelligence has sparked huge demand for workers in construction and skilled trades, which are traditionally male-dominated jobs. Meanwhile, the crisis in homecare services has forced many women to quit their careers.

Ludwig said, “In a strong labor market, good jobs and rising wages should attract more people to the workforce, not fewer,” and “we need to be alert when the situation starts to move in the opposite direction.” This could be a sign that people aren't finding the opportunities they want or need, which is important for the economy as a whole.”